Hong Kong, April 07, 2022 -- Moody's Investors Service has downgraded Times China Holdings Limited's corporate family rating (CFR) to B2 from B1, and the company's senior unsecured rating to B3 from B2.
The outlook on the ratings remains negative.
"The downgrade on the ratings reflects our expectation that Times China's liquidity will weaken because of its declining operating cash flow, driven by a likely fall in contracted sales over the next 12-18 months," says Kelly Chen, a Moody's Assistant Vice President and Analyst.
"The negative outlook reflects uncertainties over the company's ability to raise new funding from public market to support its business plan, restore its liquidity and address its refinancing needs over the next 12-18 months," adds Chen.
RATINGS RATIONALE
Moody's forecasts Times China's liquidity will weaken in view of the company's declining contracted sales and constrained access to debt capital markets. Specifically, Moody's expects Times China's contracted sales will fall by 35%-40% in 2022 and continue to decline in 2023, driven by its diminished saleable resources and weak homebuyer confidence. The drop in contracted sales will reduce the company's operating cash flow and, in turn, its liquidity.
Meanwhile, Times China relies heavily on onshore and offshore bond markets for funding, which together accounted for 58% of its total debt as of the end of 2021. In particular, the company has USD342 million of offshore bonds maturing in April 2022 and USD300 million maturing in March 2023. Given the volatile funding conditions, it is highly uncertain that the company will be able to issue new bonds to refinance these maturing debts.
Times China will repay a material portion of its maturing public debt using its internal cash sources if the refinancing channels keep closed, which will reduce its funding headroom to support its business operations. At the same time, Moody's believes the company will scale down land acquisitions and developments, as well as control expenses to preserve liquidity for debt servicing.
Times China's unrestricted cash declined to RMB14.7 billion as of the end of 2021 from RMB22.2 billion as of the end of June 2021, driven by debt repayment, weakened operating performance and ongoing spending on urban redevelopment projects (URPs). In addition, Moody's believes that part of such cash is kept at the project level and cannot be mobilized immediately to service the company's debt when needed.
Moody's expects Times China to maintain its access to onshore bank loans to support its operations. The company has secured RMB1.55 billion of new financing sources from banks and financial institutions in the first three months of 2022.
Moody's notes that Times China's auditor, Ernst & Young, indicated in its financial result announcement of 2021 the existence of material uncertainty in the company's ability to continue as a going concern. Moody's expects such an incident to weaken investors' confidence and the company's access to funding.
Moody's forecasts Times China's interest coverage, measured by EBIT/interest coverage, will decrease to 2.5x-3.0x over the next 12-18 months from 3.2x for 2021. This expectation reflects Times China's slower revenue recognition and declining profit margins despite lower interest expenses because of a likely decrease in debt.
Times China's B2 CFR continues to reflect the company's leading market position in Guangdong province and its good property development track record. However, the company's geographic concentration in Guangdong province limits its operational flexibility and exposes it to regional economic and regulatory risks. Its increased exposure to joint venture (JV) businesses also lowers corporate transparency over its credit metrics.
Times China's B3 senior unsecured rating is one notch lower than its CFR, reflecting the risk of structural subordination. Most of Times China's claims are at its operating subsidiaries and have priority over claims at the holding company in a bankruptcy scenario. In addition, the holding company lacks significant mitigating factors for structural subordination. As a result, the likely recovery rate for claims at the holding company will be lower.
As for environmental, social and governance (ESG) risks, Moody's has considered Times China's (1) increased JV exposure, which reduces its corporate transparency over its credit metrics; (2)Times China's concentrated ownership by its key shareholders, Shum Chiu Hung and his wife, who jointly held a 61.64% stake as of the end of June 2021; (3) adherence to the Listing Rules of the Hong Kong Stock Exchange and the Securities and Futures Ordinance in Hong Kong SAR, China on related-party transactions, and (4) the presence of three independent nonexecutive directors on the company's nine-member board, which provides management oversight. The independent nonexecutive directors also chair the company's audit and remuneration committees.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of Times China ratings is unlikely over the next 12 months, given the negative outlook.
However, Moody's could change the outlook to stable if the company improves its liquidity and access to funding; and strengthens its contracted sales over the next 12-18 months.
On the other hand, Moody's could downgrade Times China's ratings if its access to funding and liquidity deteriorates further.
The principal methodology used in these ratings was Homebuilding And Property Development Industry published in January 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1108031. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Based in Guangdong province, Times China Holdings Limited is a property developer that focuses on mass-market housing. As of end of 2021, the company's land bank totaled around 19.9 million square meters across 17 cities in Guangdong and in major provincial cities such as Changsha, Wuhan, Chengdu and Hangzhou.
REGULATORY DISCLOSURES
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The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.
Chen Chen
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Franco Leung
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
